Articles from April 2012

Fears in Europe have escalated a notch amid growing concern on both economic data and political cohesion. This morning S&P have taken a negative rating action on 16 Spanish banks, in addition press reports out of Germany suggest that a Merkel-Hollande alliance will not be as straightforward as the Merkozy alliance.

At the moment the euro is holding up fairly well as the market has been selling the US Dollar on sentiment that the Federal Reserve will ease further, however the underlying negative tone will be a concern to the markets.

Later this week the ECB are expected to leave interest rates on hold, however Mario Draghi will face tough questions in the press conference on the strategy for Europe amid growing concerns for a growth compact.

USA jobs data will be a main data point to watch this week.

Friday’s non-farm payroll report will form important sentiment for the pace of the US recovery after last month’s disappointing number which followed a good run of jobs data.

The number is expected to be a good number and the feedback on this data will be a key factor for the Feds future strategy-a bad number and we can expect more easing.

In the UK, attention will focus on the PMI data tomorrow and Thursday which will offer a snippet of growth feedback following last week’s preliminary Q1 GDP which came in negative.

Again if data proves negative it could trip the Bank of England to pump more QE through the system- possibly at the May MPC meeting.

Like the rain in the UK over the last few weeks it never rains, but it pours. The weather in Spain may be better, but economically the situation continues to be dire.

Overnight S&P the ratings agency, cut the Spanish credit rating to BBB+ from a reflecting the increased fear that the government will need to provide further fiscal support to the ailing banking sector.

To compound matters, the Spanish unemployment number came in higher than expected; a staggering 24.4% of the population is now without a job.

The figure is higher amongst younger people, with almost half looking for work.

As labour market laws are overhauled unemployment is likely to get worse before it gets better, meaning there will be further pressure on the Spanish credit rating and hence the rate at which Spain can borrow in the market moving forward.

Amazingly, Sterling shrugged off the negative GDP figure on Wednesday and now trades slightly higher against the Euro and Dollar than before the announcement.

This is probably due to the worse than expected European news more than Sterling gaining, but the Pound is likely to come under pressure at some point over the coming week.

The US Dollar remains subdued after the Fed statement earlier in the week neither confirmed nor ruled out further easing.

The uncertain stance has left the Dollar slightly rudderless given that we are also fairly risk neutral across the markets as a whole (but on the negative side of neutral).

That should come to an end when the US GDP number comes out this afternoon, with expectations of an annualised rate of 2.5%.

Ben Bernanke head of the US Federal Reserve predictably kept policy on hold whilst reducing forecasts for unemployment and raising expectations for higher near term inflation. The US economy is still expected to grow at a ‘moderate’ pace in coming quarters, with the bulk of Fed members predicting the first tightening in 2014 or beyond.

The one concession to markets was the fact that the Fed is ready to do further in terms of policy development if required.

This helped to boost risk assets overnight leaving the Greenback on the back foot.

Headline releases are thin on the ground today leaving markets to consolidate gains in a relatively ‘risk on’ environment.

Sterling came plummeting down from its summit following yesterday’s news that the UK economy entered a technical recession after GDP unexpectedly contracted by 0.2% in the first quarter of the year.

Nevertheless, the fall was short lived, with Cable improving from its losses, helped by a superb reading for UK Nationwide consumer confidence in March.

However, Nationwide cautioned that the spring in confidence may be brief and therefore cautious of reading too much into this.

Sterling gains against the euro look as though they have reached its limit.

Finally, there was no adjustment in policy from the Royal Bank of New Zealand as expected, with policy rates on hold at 2.5%.

However, governor Bollard did endeavour to talk the kiwi lower while stressing worries about the international outlook.

Concerns about kiwi strength will raise the spirit of FX interference though it may also mean a delay in rate hikes.

The announcement was fairly encouraging on the domestic outlook too.

Even though rates are ‘appropriate’ according to the RBNZ there is a good chance of a rate hike in Q3.

The NZD ignored Bollard’s comments, firming on the back of improved risk appetite.

UK Q1 GDP has come in at 0.2% which means the UK is confirmed in a technical recession (the final GDP figure is out later in the month). The news has trimmed 50 points from Cable and Sterling-Euro in quick time and will keep the Pound on the back foot for the rest of the day.

As we thought it was the construction sector that dragged the number down, showing a decrease of 3% in Q1 2012.

Eurozone data is light today so the focus will remain on the politics of austerity and how it continues to disrupt single currency governments.

With the Dutch cabinet resigning at the beginning of the week, the uncertainty over the outcome of the French election and German Chancellor Angela Merkel facing open rebellion by other European nations over her demand for further austerity, euro sentiment is taking a beating and dragging the euro lower with it.

Today marks the end of the two days FOMC interest rate meeting in the US.

It is expected that the Fed will keep rates and QE on hold, but as ever, it will be what the Fed indicates it will be doing over further easing later this year that moves the markets.

Wording will be key, but we can expect the Fed to continue to the cautious optimism tone of recent meetings.

Also later today is the US durable goods order figure, with consensus estimates showing a decline of around 1.5% in March?

Yesterday European shares and the euro came under renewed pressure after confirmation that Spain’s economy was again in recession and German PMI for April was unexpectedly down. To add fuel to the growing fire the Dutch PM and entire cabinet resigned piling political worries on top of economic woes.

Along with a steep fall in shares we saw spreads widening between struggling sovereign Euro economies and Germany, in addition the Dutch/German spread widened.

Lots of risk aversion in afternoon trading yesterday with the main benefactors being the US Dollar and the Japanese Yen.

Today we have started a little brighter and bond spreads have narrowed slightly from yesterday- the main reason for this is that Dutch, Spanish and Italian bond auctions all went well helping to firm up the Euro from yesterday’s lows.

The main take from yesterday is just how quickly things can turn sour and this highlights the fickle position of the ailing euro.

Today we have seen UK data in the form of public sector net borrowing which showed that the government borrowed more than expected for March but still met its annual target.

Tomorrow we see the crucial preliminary first quarter GDP data.

We have seen some bright sparks in the UK economy of late in relation to unemployment data and retail sales.

However the data has been inconsistent and we have seen a weak performance in the construction sector which could lead to a negative number.

Tomorrow’s number if negative would be a huge blow psychologically to the UK’s recovery and will undoubtedly hit confidence in the UK’s recovery strategy and the pound.

Conversely if we see a stronger than expected number we could see the Pound rally further after a strong performance recently.

The International Monetary Fund’s (IMF) has raised an additional £268 billion ($430 billion) for the pot meaning another set of support for the eurozone when it will be required.However, several other uncertainties persist to bother markets signifying that any rally could be short lived.

There is plenty of data and events this week including central bank decisions in the US, Japan and New Zealand.

In addition, US corporate earnings will stay under the spot light while bond auctions in the eurozone will also provide market drive.

It is doubtful that the Fed meeting tomorrow and Wednesday will incite any change in the currently low FX volatility atmosphere given that strategy settings will stay unchanged, with the bulk of FOMC members likely to look for the first alterations at the earliest in 2014.

The Fed as a result is unlikely to stir the Greenback out of its daze and if anything a fall in durable goods orders, little change in new home sales and a pull back in consumer confidence will play in support to Dollar bears over the coming week.

Even a relatively firm reading for Q1 GDP will be seen as backward looking given the slowing expected in Q2.

Over to Europe and the single European currency will have to compete with political proceedings as it absorbs the outcome of the initial round of the French presidential elections.

The reality is that the political course will carry on to a second round on 6 May which will act as a limit on the euro.

A variety of ‘flash’ purchasing managers indices (PMI) readings and economic opinion gauges will present some primary direction for the Euro but mostly stable to softer readings suggest little stimulation.

As a result euro/ US Dollar will largely remain within its recent range although news from Spain and Italy and their debt markets will have the potential to bring into play larger moves against the euro.

The UK has offered just under £10 billion in loans to the International Monetary Fund (IMF) to help economies in trouble.It is part of a global effort to bolster the fund’s lending capacity, which IMF managing director Christine Lagarde wanted to increase by £250 billion ($400 billion).

The UK is not alone in funding the lifeboat. Japan will contribute $60 billion, Australia $7 billion, Singapore $4 billion and the Republic of Korea $15 billion.

The IMF had already received commitments of $320 billion.

Finance ministers from the G20 group of leading economies discussed boosting the IMF’s resources at a meeting in Washington.

Mr Osborne said the loan was important to the UK: “It’s in Britain’s interest that we have a stable and strong world economy – that creates jobs in Britain.”

He added that any loan made would bring in a return in the form of interest.

He can lend up to £10 billion without parliamentary approval because Parliament has previously approved £40 billion of loans, of which only £30 billion has so far been committed.

But this latest pledge is unpopular with some members of Mr Osborne’s Conservative Party, who had been urging him not to sign up to an increase.

Backbench MP Peter Bone described the decision as “bonkers”, describing any efforts to prop up the eurozone as a waste of time.

The UK Independence Party leader, Nigel Farage, said: “[Mr] Osborne must tell the IMF that he will not donate one more penny piece to the failed euro bailouts.”

The Treasury says its contribution to the IMF is not public spending. All UK loans to the IMF are financed from the UK’s Official Reserves, remain UK assets and do not contribute to public sector net debt.

The IMF hopes that if private investors think that countries in trouble can be rescued if necessary, they will be more willing to lend to them and any funding problems will not escalate.

It has already warned that the eurozone’s debt crisis poses the biggest threat to the global economy, and warnings about Europe are expected to top the eventual communique from the meetings.

Money markets were dealt a surprise as the Consumer Price Index (CPI) rose in the UK to 3.5% up from 3.4% in February according to the Office for National Statistics. The ONS blamed higher food prices specifically soft drinks, bread, cereal, meat, fruit and vegetables coupled with rises in clothing & footwear.

However there was some good news as utility bills were lower than one year ago following energy companies reducing tariffs in February last year.

All eyes will know be on the Bank of England as this latest rise could reduce the likelihood of additional Quantitative Easing in next months MPC meeting but with stuttering growth the Bank of England may have no choice.

So far today in the UK we have seen the UK Jobless Claims figures fall for this first time since last spring.

Unemployment fell by 35,000 to 2.65m according the ONS leaving the overall rate at 8.3%.

Furthermore we saw voting in the Bank of England for interest rates and QE voting come in at 9-0 and 8-1 to keep rates on hold and maintain the contribution at £3.25bln.

Sterling has rallied as a result of these figures and currently sits at 1.2212 against the Euro the highest reading since September 2010. Cable has also risen against the US Dollar and is fast approaching the key psychological level of 1.60 currently trading at 1.5979.

In other financial news Warren Buffet has announced he has stage one prostate Cancer which will create further hype around the successor to his Berkshire Hathaway business.

As for the rest of this week we are pretty light on data with inflation data in New Zealand, Canada and the Germany of any real significance.

The cost of borrowing for Spain has jumped above 6%- increasing fears of a bailout.The yield on Spain’s 10 year bonds reached 6.1%, ahead of auctions of debt on Tuesday and Thursday that could be increasingly expensive for Spain.

Investors have been worried by data showing Spain’s banks are entirely dependent on emergency ECB loans.

In comparison, the yield on 10 year bonds from Germany- the eurozone’s strongest economy, is only 1.73%.

Spain is suffering from a deep economic slump brought about by a bust in its property and construction markets and over spending by the autonomous regions on health and education.

The rise in Spanish bond yields adds to the evidence of storms returning to the eurozone.

Interest rates of over 6% are not affordable if sustained indefinitely, though Spain is still below the 7% threshold that has sometimes been seen as triggering the need for a bailout.

There are also worries that the government might face a large bill to prop up the country’s banks, which made heavy losses on loans to property buyers.

The Bank of Spain said recently that the county’s economy contracted in the first quarter of the year – but it did not say by how much. The economy shrank by 0.3% in the three months to December, so this additional contraction implies that Spain’s economy is in recession.

On Friday, the Bank of Spain – the central bank – said its net lending to its banks in March had risen to 228 billion euros (£188 billion), up from “only” 152 billion euros a month earlier.

The big jump was mainly due to a second auction of three year emergency loans carried out by the European Central Bank, which has given 1 trillion euros to banks since December.

This money was intended to be lent by the ECB to national central banks, which is turn lent to commercial banks who would buy their country’s debts and bring borrowing costs down.

But these loans are creating their own financial headaches- as Spanish banks are now sitting on rising loses as spanish government debts fall.

Italian borrowing costs soared yesterday following new concerns about their ability to reduce its high levels of debt. In the latest auction the Italian government paid an interest rate of 3.89%- up from 2.76% last month and this has been against the recent trends but investors are becoming increasingly sceptical over Italy’s and Spain’s ability to reach deficit targets.

As a result newly elected governments in both countries have announced austerity measures to reach strict debt reduction targets.

Coupled with these figures, Greece published its latest unemployment data yesterday indicating a further rise with the overall rate pushed to 21.8% up from 14.8% at the same point last year.

Despite the bad news the euro remains towards to the higher of its recent trading range against the US Dollar currently trading in the high 1.31s and Sterling trades just above 1.21 at 1.2104.

So far this morning China has published its latest growth figures revealing the world’s second largest economy has grown at its slowest pace for nearly three years.

GDP increased by 8.1% down from 8.9% in the previous quarter and below expectations of 8.3%.

The numbers are being blamed on the fall in demand for exports from the Europe and the US and consequently we could see risk assets hit hard today.

To end the week we have the Michigan confidence figure, which assesses consumer confidence on personal finances, business conditions and purchasing power based on telephone surveys and provides a real time assessment of US consumer sentiment.